Toyota lifts forecast sharply but yen remains drag

TOKYO (Reuters) - Toyota Motor Corp lifted its annual forecasts beyond market expectations as cost-cuts and sales exceeded its plans, but a heavy reliance on exports will keep it a laggard as long as the yen stays strong.

The world's top automaker posted a smaller-than-expected fall in third-quarter profits and raised its sales forecast for the year ending March 31 by 70,000 vehicles to 7.48 million, thanks to better than expected sales in Asia, Japan and Russia.

Toyota kept its forecasts unchanged for North America, where its sales have lagged since last year in the wake of a series of recalls that hurt its reputation for quality.

Separately, a 10-month investigation by the U.S. Department of Transportation found that there was no link between electronic throttles and unintended acceleration in Toyota vehicles.

That result vindicated the automaker's long-held position and sent its shares up more than 4 percent in U.S. trade.

"Compared with other Japanese automakers, Toyota has greater exposure to the domestic market and therefore is more subject to the negative impact of the country's slow economic growth," said Kazuyuki Terao, chief investment officer at RCM Japan in Tokyo.

Toyota, which stayed ahead of General Motors Co as the world's biggest automaker by a thinner margin last year, lifted its operating profit forecast for the year to 550 billion yen (4.16 billion pounds) from 380 billion yen, well above the 489 billion yen consensus in a survey of 23 analysts.

COST-CUTTING

Toyota expects cost-cutting to add 170 billion yen to annual operating profit, 30 billion yen more than it had expected three months ago, and also expects to save 20 billion yen by trimming research and development and other spending.

"Our efforts to improve our profitability came through faster than we expected," Senior Managing Director Takahiko Ijichi told a news conference. "Our break-even point has undoubtedly fallen and our earnings power is gradually improving."

Still, Toyota is only forecasting an operating margin of 2.9 percent for the year to end-March, lower than Japan's No. 2 Nissan Motor Co Ltd and third-ranked Honda Motor Co Ltd.

Underlining its exposure to the yen, which hit a 15-year high against the dollar in the October-December reporting period, the maker of the Prius hybrid and Corolla sedan built nearly 3.3 million vehicles in Japan.

Excluding units from affiliates Daihatsu Motor Co Ltd and Hino Motors Ltd, that represents 43 percent of its total production -- much higher than Honda and Nissan, which build 27 to 28 percent of their vehicles in Japan.

Toyota shipped more than half of those vehicles overseas, losing money on many of them with the dollar well below the rate of 90 yen that President Akio Toyoda has said is the minimum to keep Japan's manufacturing sector competitive.

Nissan is expected on Wednesday to report a drop in third-quarter operating profits and Honda has already posted weaker results for the period.

U.S. AND JAPAN EYED

Toyota is also still grappling with quality issues after recalling almost 16 million vehicles since late 2009, most of them in the United States, where it underperformed last year.

With overall demand in the key U.S. market improving, however, analysts say Toyota's disproportionately large Japanese operations will remain the biggest drag on its earnings.

Although Japan's car market is shrinking with a declining population and urbanization, Toyota's founding family chief, Toyoda, has vowed to build a minimum 3 million vehicles a year at home to keep the tradition of manufacturing alive. Honda built less than 1 million cars in Japan last year, while Nissan produced 1.13 million.

That has kept Toyota's parent-only operations deep in the red, with an operating loss of 420 billion yen expected this year, and some investors are eager to see a greater proportion of cars built where they are sold.

"I would like to see progress in rebalancing of their production footprint to mitigate eroding export margins," said Neo Chiu Yen, vice president at ABN AMRO Private Bank.

Ijichi conceded that Toyota has no quick fix to absorb the yen's debilitating rise. For now, Toyota is raising product prices wherever possible, pushing sales of higher-margin cars and trying to sell more cars made outside Japan, he said.

The Japanese currency may become less of a burden with a February 2 Reuters poll forecasting a weakening to 90 yen per dollar in a year's time.

Wide-ranging estimates from nine analysts surveyed by Reuters had put the third-quarter operating profit at an average 70.6 billion yen. Profits made in China are not counted on the operating level at Toyota, which reports under U.S. accounting rules.

Before the results were announced on Tuesday, Toyota ended Japanese trading unchanged from the previous day at 3,490 yen, while the TOPIX gained 0.4 percent. In afternoon New York Stock Exchange trading, shares were up $3.72 (2.31 pounds) or 4.4 percent to $88.85.